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Tuesday, January 14, 2014

Proxy Pox

In
the midst of the annual meeting, one homeowner stood up and challenged the
practice of homeowners collecting ten, twenty or thirty proxies and conducting
block voting for electing members to serve on the Board of Directors. While a few homeowner associations do
restrict the number of proxy votes (perhaps to just two or three) a person may
cast, most do not.

This
is because of the other part of the equation that needs to be
considered: Quorum. A quorum is the minimum number of homes that
have to be represented in order for the community to conduct business. If not enough owners are represented in
person or by proxy, elections cannot be held, leaving the current Board in
place. This possibly leads to Board
members selecting their own replacements without homeowner input.

The
required quorum percentage varies widely.
Communities with more homes tend to have lower thresholds, while very
small neighborhoods may require 50% or more of their membership to be present. A 25% or 33% quorum is typical.

Very
often quorum cannot be reached without large numbers of proxies being
collected. If quorum is reduced to a
low level and proxies are capped, an avenue is created permitting a few
discontented homeowners to frequently change the composition of the Board. Careful deliberation is impossible in such an
environment, and very little community business is able to be conducted.

In
one community of 200 homes, the quorum requirement was 5% of eligible
(non-delinquent) homes. Because of
delinquencies, only 150 homes were eligible.
This meant that 7.5 homes, rounded up to 8, were required for
quorum.

Because
of the high delinquency rate, the Board implemented a firm but fair collections
program. A group of five delinquent
homeowners paid off their debt, met the requirements to demand a special
meeting, and ousted all Board members, placing themselves in charge. Their first order of business was to fire the
collections attorney and management company, and then proceed to gut all other
services, with the goal of slashing assessments in half. Many homeowners, not considering the
long-term impact of unrealistically low assessments, did not challenge these
actions. The result: It was many years before any quality vendors
would agree to work in the community, and less-savory vendors took full
advantage of the situation. Property
values rapidly deteriorated along with the infrastructure. It took the threat of condemnation by the
county before homeowners took steps to reverse course.

While the above is an extreme real-life example,
similar results occur with other communities operating under low quorum
requirements. Ultimately, everything
boils down to apathy, the final part of the equation which must be balanced out
with the right mix of proxy usage and quorum threshold. With the advent of electronic balloting and
social media, perhaps this mix can be adjusted, but communities should move
carefully in tweaking voting regulations.